UPDATE 2-BOJ hails Fed tapering, sticks with its own massive stimulus

Fri Dec 20, 2013 5:10am EST

* BOJ keeps monetary policy steady as expected
    * Maintains view economy recovering moderately
    * BOJ tweaks view on outlook to stress tax hike impact
    * Kuroda says Fed tapering sign of U.S. economic strength
    * Sales tax hike won't derail path to meeting BOJ price goal


    By Leika Kihara and Stanley White
    TOKYO, Dec 20 (Reuters) - Japan's central bank held its
massive monetary expansion unchanged on Friday, and played down
chances of the need for an extra dose next year as it took heart
from the U.S. Federal Reserve's decision to begin tapering its
own mega-stimulus.
    Speaking after a Bank of Japan policy-setting meeting,
Governor Haruhiko Kuroda welcomed the Fed's move as a sign that
the U.S. economy is recovering steadily, which bodes well for
global growth and Japan.
    Kuroda also played down the likely impact of a planned
increase in Japan's sale tax in April on the economy, saying the
country was on course to meet the BOJ's 2 percent inflation
target in two years to decisively exit from a long phase of
debilitating deflation.
    The widening interest rate gap between Japan and the United
States, as the BOJ maintains its ultra-easy policy while the Fed
winds down its stimulus, is likely to keep the yen weak against
the dollar, analysts say.
    The dollar hit a fresh five-year high of 104.59 yen on
Friday, extending the weak-yen trend that has helped Japan's
export-reliant economy emerge from stagnation.
    "Frankly speaking, the correction of excessive yen strength
has had a positive effect on Japan's economy," Kuroda told a
news conference, while stressing that BOJ policy was not
directly targeting the exchange rate.
    "Corporate earnings have risen and sentiment has improved."
    Japan's economy outpaced its G7 counterparts in the first
half of this year as Prime Minister Shinzo Abe's stimulus
policies boosted business and household sentiment.
    Kuroda said the BOJ would be watching the impact of the Fed
tapering, while seeing it as a good sign.
    "The Fed's tapering of its asset purchases is basically
because the U.S. economic recovery is proceeding well."
    The Fed's success in making the switch to tapering without
disrupting markets removed one uncertainty for the BOJ and may
give it more time to decide whether further stimulus will be
needed in Japan next year, analysts say.
 
   
    TAX HIKE LOOMS
    The BOJ offered an intense burst of monetary stimulus in
April, pledging to double the supply of money in two years by
boosting purchases of government bonds and risky assets. It has
stood pat on monetary policy since then.
    On Friday, as widely expected, the BOJ voted unanimously to
stick with its strategy of increasing base money, or cash and
deposits at the central bank, at an annual pace of 60 trillion
yen ($576 billion) to 70 trillion yen.
    It also maintained its upbeat view that Japan's economy is
recovering moderately, encouraged by growing signs the benefits
of its stimulus are broadening.
    Kuroda saw Japan overcoming the impact of next April's sales
tax hike.
    "Economic growth may slump in the second quarter (of next
year), but that's in reaction to increased demand in the run-up
to the sales tax hike. Taken together, they offset each other,"
he said.
    "There's no change to our view that Japan will make progress
steadily toward achieving the BOJ's 2 percent inflation target,
albeit with some fluctuations."
    His remarks suggest the BOJ sees no reason to consider
easing further any time soon, with Japan's economic recovery
gathering momentum and the weak yen supporting exports.
    But not all in the BOJ are so optimistic with many central
bankers foreseeing challenges next year, when the sales tax rise
hits consumers and inflation loses some of the boost passed on
by a weak yen through higher import costs.
    A Reuters poll conducted earlier this month found that
almost two-thirds of Japanese firms expect the BOJ to increase
its stimulus in the first six months of 2014.
    Mindful of concerns about the pain from the tax hike, the
BOJ slightly tweaked its view on the outlook to say it will
"continue a moderate recovery as a trend" despite the effect of
the tax hike. Last month, it only said the economy will continue
recovering moderately.
    Japan's economic growth slowed in July-September, but is
seen accelerating again due to extra demand generated by buying
ahead of the sales tax hike, plus an increase in public works
spending under a fiscal stimulus plan to cushion the pain from
the tax hike.
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